-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AWSMFTyt1yRarPRwd974NeBeewIUODPDhwMfPAFxYHpjha+7BLu2ioGSzlneMbkW huXw9JeyVw0jEUQ3htfD+w== 0000898430-98-002037.txt : 19980519 0000898430-98-002037.hdr.sgml : 19980519 ACCESSION NUMBER: 0000898430-98-002037 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19980518 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RENAL TREATMENT CENTERS INC /DE/ CENTRAL INDEX KEY: 0000899169 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SPECIALTY OUTPATIENT FACILITIES, NEC [8093] IRS NUMBER: 232518331 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-21398 FILM NUMBER: 98627138 BUSINESS ADDRESS: STREET 1: 1180 WEST SWEDESFORD RD STREET 2: BLDG 2, STE 300 CITY: BERWYN STATE: PA ZIP: 19312 BUSINESS PHONE: 6106444796 MAIL ADDRESS: STREET 1: 1180 WEST SWEDESFORD ROAD BLDG 2 STREET 2: SUITE 300 CITY: BERWYN STATE: PA ZIP: 19312 10-K405/A 1 FORM 10-K405/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission file number 1-14142 ________________________________________________________________________________ RENAL TREATMENT CENTERS, INC. (Exact name of Registrant as specified in its charter) DELAWARE 23-2518331 (State of incorporation) (I.R.S. Employer Identification No.) 1180 W. Swedesford Road Building 2, Suite 300 Berwyn, Pennsylvania 19312 (Address of principal executive offices) (Zip Code) (610) 644-4796 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE SECURITIES EXCHANGE ACT OF 1934: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, $.01 par value New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ____ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On March 14, 1997, the aggregate market value (based on the closing sale price on that date) of the voting stock held by non-affiliates of the Registrant was approximately $621,470,000. The number of shares of the Registrant's Common Stock outstanding as of March 14, 1997 was 24,617,217. PART II INTRODUCTORY STATEMENT Renal Treatment Centers, Inc. ("RTC") was acquired by Total Renal Care Holdings, Inc. ("TRCH") on February 27, 1998. On April 1, 1998, TRCH announced (i) that it had undertaken a detailed review of RTC's accounts receivable and other balance sheet accounts in connection with the completion of the audit of RTC's financial statements for the fiscal year ended December 31, 1997, and (ii) that as a result of such review, it expected to recognize between $25 million and $30 million of non-cash charges related to prior periods which would require a revision of RTC's previously announced results of operations. On April 30, 1998, TRCH announced that RTC might be required to correct previously audited financial statements. The analysis of RTC's financial statements was completed on May 15, 1998. In order to correct certain errors discovered through such analysis, TRCH has determined to (i) restate RTC's previously audited financial statements for the fiscal year ended December 31, 1996 ("Fiscal 1996") and (ii) revise RTC's previously filed financial statements for the fiscal quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 and RTC's previously announced results of operations for the fiscal quarters ended March 31, 1996 and 1997, June 30, 1996 and 1997, September 30, 1996 and 1997 and December 31, 1996 and 1997 and the fiscal years ended December 31, 1996 and 1997. This Form 10-K/A is being filed to amend the audited financial statements for Fiscal 1996 included in RTC's Form 10-K for Fiscal 1996 which was filed on March 29, 1997. RTC is concurrently filing separate Form 10-Q/A's to correct the financial statements included in the Form 10-Q's previously filed for the first three fiscal quarters in 1997. The balance sheet included in the audited financial statements for Fiscal 1996 filed herewith is being corrected to reflect a reduction of accounts receivable at December 31, 1996 and to reflect the impact of the changes to the statements of income for Fiscal 1996 described below. The statement of income included in such audited financial statements is being corrected to reflect a related reduction of net patient revenue for Fiscal 1996 and a related increase in the provision for doubtful accounts. The corrected statement of income also includes a reduction in the provision for income taxes reflecting the reduction in taxable income resulting from the corrections described above. (See Note 13 of the financial statements filed herewith) Approximately one half of the charges described above relate to untimely billing and subsequent requests for information by RTC with governmental payors (primarily state medicaid programs) and contracted private payors. The remainder relates primarily to improper contractual allowances related to revenue recognition at the time of billing and to uncollectible accounts. TRCH believes that the causes of such problems have been appropriately addressed and that systems and processes are now in place to ensure accurate contractual allowances related to revenue recognition and timely account resolution, including all appropriate collection efforts. Information included in Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) under the captions "Results of Operations" and "Year Ended December 31, 1996 Compared to Year Ended December 31, 1995") of RTC's Form 10-K for Fiscal 1996 was based on RTC's audited consolidated financial statements prior to the corrections described above. Consequently, the information included in Item 7 under such captions overstates both net patient revenue and the provision for income taxes and understates the provision for doubtful accounts as described above. RTC believes that the amendment of Item 7 to discuss such corrections would provide no material additional information not already presented in Item 7 of the Form 10-K as originally filed or in this Form 10-K/A. Consequently, such Item 7 is not restated in this Form 10-K/A. ITEM 6. SELECTED FINANCIAL DATA: The selected consolidated financial data presented below as of December 31, 1995 and 1996, and for the years ended December 31, 1994, 1995 and 1996, have been derived from the Company's audited consolidated financial statements and should be read in conjunction with such audited consolidated financial statements and notes thereto, which are included herein. Certain adjustments have been made to the 1996 financial statements to correct errors in previously reported amounts, as described in note 13 to the financial statements. The selected consolidated financial statements presented below as of December 31, 1992, 1993 and 1994, and for the years ended December 31, 1992 and 1993, have been derived from the Company's audited financial statements not included herein.
Year Ended December 31 ---------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- (dollars in thousands, except for per share data) STATEMENT OF INCOME DATA: Net patient revenue $54,041 $73,043 $115,457 $164,568 $225,077 Operating costs and expenses: Patient care costs 27,854 37,172 57,096 79,451 114,804 General and administrative 16,083 20,756 32,622 41,382 58,472 Provision for doubtful accounts 967 1,551 3,121 4,761 10,241 Depreciation and amortization 3,123 4,145 7,603 12,066 17,077 Merger expenses - - - 2,088 2,808 Income from operations 6,014 9,419 15,015 24,820 21,675 Interest, net 1,433 1,536 648 2,557 4,384 Income before income taxes 4,581 7,883 14,367 22,263 17,291 Provision for income taxes 1,052 2,102 4,316 7,632 6,609 Net income $3,529 $5,781 $10,051 $14,631 $10,682 Pro forma net income per common and common stock equivalent (1) $0.36 Pro forma weighted average shares used in computing net income per common and common stock equivalents (1) 16,063,639 Basic earnings per share $0.49 $0.67 $0.44 Weighted average common stock 20,412,982 21,868,067 24,230,156 As of December 31, ------------------ 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- (dollars in thousands) BALANCE SHEET DATA: Working capital $3,960 $13,709 $27,947 $43,380 $85,677 Intangible assets, net 16,892 28,934 79,238 86,362 130,645 Total assets 37,035 60,007 140,523 174,868 293,948 Total long-term debt 12,389 18,070 28,744 42,576 130,574 Total liabilities 25,028 29,349 47,894 64,510 165,814 Cumulative redeemable preferred stock 9,528 - - - - Total stockholders' equity $2,478 $30,658 $92,628 $110,358 128,134
(1) Pro forma net income is computed by adjusting net income to reflect the reduction in interest expense (net of tax effect) related to the payment of certain indebtedness with initial public offering proceeds. Pro forma net income per common share is computed based upon the weighted average number of shares of common stock and common stock equivalents and including the number of shares of common stock issued upon the conversion of preferred stock and exercise of common stock warrants, and 3,700,000 shares issued in connection with the Company's initial public offering as if such shares were issued or converted as of January 1, 1993. The proceeds from the issuance of 3,700,000 shares were utilized to redeem Series A preferred stock, pay series B preferred stock dividends and to pay down certain indebtedness. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA: See the Index included at "Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K: (a) Documents filed as part of this Form 10-K Report
1. Financial Statements Report of Independent Accountants.......................................................... F-1 Reports of Other Independent Accountants Relied Upon by Independent Accountants............................................. F-2 - F-3 Financial Statements: Consolidated Balance Sheets at December 31, 1995 and 1996............................. F-4 Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996............................................ F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996................................ F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996............................................ F-7 Notes to Consolidated Financial Statements............................................ F-8 - F-18 2. Financial Statement Schedules: II. Valuation and Qualifying Accounts, for the years ended December 31, 1996, 1995 and 1994......................................................................... F-19
Schedules other than those listed above are omitted because they are either not applicable or not required or because the information required is contained in the financial statements or notes thereto. The financial statement schedules are covered by the Report of Independent Accountants on Page F-1. 3. Exhibits: Exhibit Description - ------- ----------- 3.1 Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit No. 3.1 filed under the Company's Amendment No. 1 to Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996). 3.1.1 Certificate of Amendment dated February 29, 1996 to Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit No. 3.1.1 filed under the Company's Amendment No. 1 to Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996). 3.2 By-Laws of the Company and Amendment to By-Laws adopted February 9, 1993 (incorporated herein by reference to Exhibit No. 3.2 filed under the Company's Form S-1 Registration Statement No. 33-59850). 4.1 Specimen Certificate of Common Stock of the Company (incorporated herein by reference to Exhibit No. 4.1 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 4.2 Indenture dated June 12, 1996 by the Company to PNC Bank, National Association, Trustee, including form of the Company's 5 5/8% Convertible Subordinated Notes due 2006 issued under the Indenture (incorporated herein by reference to Exhibit No. 4.2 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 4.3 Registration Rights Agreement dated as of June 12, 1996 by and among the Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC, J.C. Bradford & Co. and Wessels, Arnold & Henderson (incorporated herein by reference to Exhibit No. 4.3 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.1* Renal Treatment Centers, Inc. Amended and Restated 1990 Stock Plan.+ 10.1.1* Form of Stock Option Agreement under the Company's Amended and Restated 1990 Stock Plan (incorporated herein by reference to Exhibit No. 10.1.3 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2* Renal Treatment Centers, Inc. Equity Incentive Plan for Outside Directors (incorporated herein by reference to Exhibit No. 10.2 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.2.1* Form of Stock Option Agreement under the Company's Equity Incentive Plan for Outside Directors (incorporated herein by reference to Exhibit No. 10.2.1 filed under the Company's Annual Report on Form10-K for the year ended December 31, 1995). 10.2.2* Amendment No. 1 to the Company's Equity Incentive Plan for Outside Directors dated May 2, 1996 (incorporated herein by reference to Exhibit No. 10.2.2 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.3* Employment Agreement dated as of March 2, 1995 between the Company and Robert L. Mayer, Jr. (incorporated herein by reference to Exhibit No. 10.3 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.3.1* First Amendment to Employment Agreement dated as of May 2, 1996 between the Company and Robert L. Mayer, Jr. (incorporated herein by reference to Exhibit No. 10.3.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.4* Employment Agreement dated as of March 2, 1995 between the Company and Frederick C. Jansen (incorporated herein by reference to Exhibit No. 10.4 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.4.1* First Amendment to Employment Agreement dated as of May 2, 1996 between the Company and Frederick C. Jansen (incorporated herein by reference to Exhibit No. 10.4.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.5* Employment Agreement dated as of May 2, 1996 between the Company and Barbara A. Bednar (incorporated herein by reference to Exhibit No. 10.5 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.6* Employment Agreement dated as of August 30, 1993 between the Company and John Chambers (incorporated herein by reference to Exhibit No. 10.6 filed under the Company's Form S-1 Registration Statement No. 33-74994). 10.6.1* First Amendment to Employment Agreement dated as of May 2, 1996 between the Company and John A. Chambers (incorporated herein by reference to Exhibit No. 10.6.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.7* Resignation Agreement and Release dated January 13, 1995 by and between the Company and Michael C. Duke (incorporated herein by reference to Exhibit No. 10.7 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.8* Executive Severance Agreement dated as of May 1,1995 between the Company and Barbara A. Bednar (incorporated herein by reference to Exhibit No. 10.8 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.8.1* First Amendment to Executive Severance Agreement dated as of May 2, 1996 between the Company and Barbara A. Bednar (incorporated herein by reference to Exhibit No. 10.8.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.9* Executive Severance Agreement dated as of May 1, 1995 between the Company and Ronald H. Rodgers, Jr. (incorporated herein by reference to Exhibit No. 10.9 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.9.1* First Amendment to Executive Severance Agreement dated as of May 2, 1996 between the Company and Ronald H. Rodgers, Jr. (incorporated herein by reference to Exhibit No. 10.9.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.10* Executive Severance Agreement dated as of May 1, 1995 between the Company and John A. Chambers (incorporated herein by reference to Exhibit No. 10.10 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.10.1* First Amendment to Executive Severance Agreement dated as of May 2, 1996 between the Company and John A. Chambers (incorporated herein by reference to Exhibit No. 10.10.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.11 Fourth Amended and Restated Loan Agreement dated as of June 5, 1996 between the Company and First Union National Bank of North Carolina and the other lenders set forth therein (incorporated herein by reference to Exhibit No. 99.1 filed under the Company's Current Report on Form 8-K dated May 29, 1996). 10.12 Lease Agreement dated November 8, 1991 between the Company and Terramics/Southpoint Associates II Limited Partnership (incorporated herein by reference to Exhibit No. 10.32 filed under the Company's Form S-1 Registration Statement No. 33-59850). 10.12.1 First Amendment to Lease Agreement dated January 18, 1993 (incorporated herein by reference to Exhibit No. 10.32 filed under the Company's Form S-1 Registration Statement No. 33-59850). 10.12.2 Second Amendment to Lease dated September 30, 1993 (incorporated herein by reference to Exhibit No. 10.36 filed under the Company's Form S-1 Registration Statement No. 33-74994). 10.12.3 Confirmation of Lease Term dated November 1, 1993 (incorporated herein by reference to Exhibit No. 10.36 filed under the Company's Form S-1 Registration Statement No. 33-74994). 10.12.4 Third Amendment to Lease dated March 2, 1995 (incorporated herein by reference to Exhibit No. 10.12.4 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.12.5 Fourth Amendment to Lease dated May 30, 1996 (incorporated herein by reference to Exhibit No. 10.12.5 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.13 Earnout Note dated June 1, 1994 by and between Renal Treatment Centers- Colorado, Inc., Renal Treatment Centers - Nebraska, Inc., Renal Treatment Centers - Wyoming, Inc. and The Dialysis Centers Limited Liability Company (incorporated herein by reference to Exhibit No. 2 filed under the Company's Form 8-K Current Report dated June 15, 1994). 10.14 Agreement and Plan of Merger dated as of July 25, 1995 among the Company, Renal Treatment Centers -Kansas, Inc. and the individuals and their affiliated companies set forth therein (incorporated herein by reference to Exhibit No. 2.1 filed under the Company's Form 8-K Current Report dated August 1, 1995). 10.15 Agreement and Plan of Merger dated as of January 11, 1996 among the Company, Renal Treatment Centers - Hawaii, Inc., Intercontinental Medical Services, Inc. and Dudley S.J. Seto, M.D. (incorporated herein by reference to Exhibit No. 2.1 filed under the Company's Current Report on Form 8-K dated February 20, 1996). 10.16* Employment Agreement dated as of May 2, 1996 between the Company and Ronald H. Rodgers, Jr. (incorporated herein by reference to Exhibit No. 10.25 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.17* Employment Agreement dated as of March 11, 1996 between the Company and Thomas J. Karl (incorporated herein by reference to Exhibit No. 10.26 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.18* Executive Severance Agreement dated as of March 11, 1996 between the Company and Thomas J. Karl (incorporated herein by reference to Exhibit No. 10.27 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.19 Asset Purchase Agreement dated as of May 29, 1996 between Renal Treatment Centers - Pennsylvania, Inc. and KCCC Liquidating Trust (incorporated herein by reference to Exhibit No. 2.1 filed under the Company's Current Report on Form 8-K dated May 29, 1996). 10.20 Asset Purchase Agreement dated as of May 29, 1996 between Renal Treatment Centers - Pennsylvania, Inc. and KCDC Liquidating Trust (incorporated herein by reference to Exhibit No. 2.2 filed under the Company's Current Report on Form 8-K dated May 29, 1996). 10.21* Employment Agreement dated as of March 1, 1996 between the Company and Mark A. Zawiski (incorporated herein by reference to Exhibit No. 10.30 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.22* Executive Severance Agreement dated as of March 1, 1996 between the Company and Mark A. Zawiski (incorporated herein by reference to Exhibit No. 10.31 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.23 Asset Purchase Agreement dated as of September 7, 1996 between Renal Treatment Centers - Georgia, Inc. and Columbus Regional Dialysis Center, Inc. (incorporated herein by reference to Exhibit No. 2.1 filed under the Company's Current Report on Form 8-K dated September 16, 1996). 10.24 Asset Purchase Agreement dated as of September 7, 1996 between Renal Treatment Centers - Alabama, Inc. and Phenix City Nephrology Referral Center, Inc. (incorporated herein by reference to Exhibit No. 2.2 filed under the Company's Current Report on Form 8-K dated September 16, 1996). 21.1 Subsidiaries of the Company.+ 27.1 Amended Financial Data Schedule.X _______________ *Management Contracts and Compensatory Plans or Arrangements. +Previously filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1996. XIncluded in this filing. (b) Reports on Form 8-K Form 8-K/A Amendment No. 1 to Current Report dated September 16, 1996 filed on November 27, 1996 to file pursuant to Item 7 (a) historical financial information for the year ended December 31, 1995 and six months ended June 30, 1995 and 1996 for Columbus Regional Dialysis Center, Inc., Phenix City Nephrology Referral Center, Inc. and the Group and (b) pro-forma financial information for the Company for the year ended December 31, 1995 and the six months ended June 30, 1996 related to the acquisition of Columbus Regional Dialysis Center, Inc. and Phenix City Nephrology Referral Center, Inc. reported on Form 8-K dated September 16, 1996. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RENAL TREATMENT CENTERS, INC. By: /s/John E. King ----------------------------------- Vice President, Finance and Chief Financial Officer Date: May 18, 1998 ------------- REPORT OF INDEPENDENT ACCOUNTANTS Stockholders and Board of Directors Renal Treatment Centers, Inc. Berwyn, Pennsylvania We have audited the accompanying consolidated balance sheets of Renal Treatment Centers, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in Item 14(a) of this Form 10- K/A. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Wichita Dialysis Group and Healthcare Corporation and Affiliates for the year ended December 31, 1994. Such Companies were acquired by the Company in business combinations which have both been accounted for using the pooling of interests method of accounting, as described in Note 3 to the financial statements. The financial statements for the Companies reflect 22 percent of total consolidated net patient revenue for the year ended December 31, 1994. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for Wichita Dialysis Group and Healthcare Corporation and Affiliates, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Renal Treatment Centers, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information required to be included therein. As discussed in Note 14, the accompanying financial statements as of and for the year ended December 31, 1996 have been revised. /S/COOPERS & LYBRAND L.L.P. - --------------------------- COOPERS & LYBRAND L.L.P. Philadelphia, Pennsylvania May 14, 1998 F-1 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholder Healthcare Corporation and Affiliates Nashville, Tennessee We have audited the combined statements of income, stockholder's equity and cash flows for the year ended December 31, 1994 of Healthcare Corporation and Affiliates (the "Company"). These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such combined financial statements (not presented separately herein) present fairly, in all material respects, the results of the Company's operations and its cash flows for the year ended December 31, 1994 in conformity with generally accepted accounting principles. /s/DELOITTE & TOUCHE LLP - ------------------------ DELOITTE & TOUCHE LLP Nashville, Tennessee March 31, 1995 F-2 Independent Accountants' Report ------------------------------- The Shareholders Wichita Dialysis Group Wichita, Kansas We have audited the accompanying combined balance sheets of Wichita Dialysis Group as of December 31, 1993 and 1994, and the related combined statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Wichita Dialysis Group as of December 31, 1993 and 1994, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. /s/Baird, Kurtz & Dobson - ------------------------ Baird, Kurtz & Dobson July 14, 1995, except for Note 9 as to which the date is July 24, 1995 Wichita, Kansas F-3 Renal Treatment Centers, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1996
1995 1996 - --------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash $ 8,231,421 $ 1,445,798 Investments - 41,202,123 Accounts receivable, net of allowance for doubtful accounts of $3,503,744 in 1995 and $7,853,350 in 1996 51,996,618 65,198,524 Inventories 2,869,019 4,388,290 Deferred taxes 819,835 2,149,718 Income tax receivable --- 3,782,890 Prepaid expenses and other current assets 1,396,893 2,749,497 - --------------------------------------------------------------------------------------------------------------- Total current assets 65,313,786 120,916,840 - --------------------------------------------------------------------------------------------------------------- Property and equipment (net of accumulated depreciation of $10,746,557 in 1995 and $19,691,015 in 1996) 21,442,421 39,578,245 Intangibles (net of accumulated amortization of $22,263,385 in 1995 and $32,934,871 in 1996) 86,362,275 130,645,378 Deferred taxes, non-current 1,749,754 2,807,064 - --------------------------------------------------------------------------------------------------------------- Total assets $174,868,236 $293,947,527 =============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 4,766,262 $ 12,369,365 Accounts payable 4,495,087 11,341,983 Accrued compensation 2,790,121 3,838,502 Accrued expenses 6,576,600 4,051,614 Accrued income taxes 2,218,692 --- Accrued interest 1,087,415 3,638,874 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 21,934,177 35,240,338 - --------------------------------------------------------------------------------------------------------------- Long-term debt, net 42,576,100 130,573,685 Stockholders' equity: Preferred stock, $.01 par value, 5,000,000 shares authorized: none issued Common stock, $.01 par value, 45,000,000 shares authorized: issued and outstanding 22,209,689 shares in 1995 and 24,430,256 shares in 1996 222,097 244,303 Additional paid-in capital 83,257,068 87,890,138 Retained earnings 27,272,870 40,393,139 - --------------------------------------------------------------------------------------------------------------- 110,752,035 128,527,580 Less treasury stock, 37,202 shares in 1995 and 1996, at cost (394,076) (394,076) - --------------------------------------------------------------------------------------------------------------- Total stockholders' equity 110,357,959 128,133,504 - --------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $174,868,236 $293,947,527 ===============================================================================================================
See accompanying notes to consolidated financial statements. F-4 Renal Treatment Centers, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME for the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 - ------------------------------------------------------------------------------------------------------------- Net patient revenue $115,456,744 $164,568,392 $225,076,500 Patient care costs 57,095,740 79,451,490 114,803,209 - ------------------------------------------------------------------------------------------------------------- Operating profit 58,361,004 85,116,902 110,273,291 General and administrative expense 32,621,992 41,381,899 58,471,984 Provision for doubtful accounts 3,121,017 4,760,678 10,240,920 Depreciation and amortization expense 7,602,959 12,066,461 17,076,827 Merger expenses - 2,087,542 2,808,247 - ------------------------------------------------------------------------------------------------------------- Income from operations 15,015,036 24,820,322 21,675,313 Interest expense 1,203,617 2,713,599 6,364,556 Interest income (555,515) (156,150) (1,980,513) - ------------------------------------------------------------------------------------------------------------- Income before income taxes 14,366,934 22,262,873 17,291,270 Provision for income taxes 4,316,014 7,632,069 6,608,871 - ------------------------------------------------------------------------------------------------------------- Net income $ 10,050,920 $ 14,630,804 $ 10,682,399 ============================================================================================================= Basic earnings per share data: Earnings per share $0.49 $0.67 $0.44 Weighted average common stock 20,412,982 21,868,067 24,030,156 Diluted earnings per share data: Diluted earnings per share $0.48 $0.65 $0.43 Weighted average common stock and dilutive securities 20,726,117 23,095,135 25,646,300
See accompanying notes to consolidated financial statements. F-5 Renal Treatment Centers, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended December 31, 1994, 1995 and 1996
Additional COMMON STOCK Paid-in Retained TREASURY STOCK ------------ -------------- Shares Amount Capital Earnings Shares Amount TotaL - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1993 16,128,053 $161,281 $25,143,047 $ 5,563,576 - - $ 30,867,904 Issuance of common stock in stock offering 4,789,000 47,890 51,053,601 51,101,491 Exercise of common stock options 356,760 3,568 312,230 315,798 Issuance of common stock in connection with purchase of businesses 175,216 1,752 1,810,748 1,812,500 Acquisition of treasury stock (4,342) $ 47,219) (47,219) Dividend distribution (1,473,100) (1,473,100) Net income 10,050,920 10,050,920 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1994 21,449,029 214,491 78,319,626 14,141,396 (4,342) (47,219) 92,628,294 Exercise of common stock options 458,016 4,580 1,297,692 1,302,272 Issuance of common stock in connection with purchase of businesses 252,122 2,521 3,117,226 3,119,747 Issuance of common stock to repay debt 50,522 505 522,524 523,029 Acquisition of treasury stock (32,860) (346,857) (346,857) Dividend distribution (1,499,330) (1,499,330) Net income 14,630,804 14,630,804 - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 22,209,689 222,097 83,257,068 27,272,870 (37,202) (394,076) 110,357,959 Exercise of common stock options 263,531 2,636 3,071,113 3,073,749 Issuance of common stock in connection with mergers 1,814,632 18,146 89,137 3,096,370 3,203,653 Issuance of common stock to repay debt 142,404 1,424 1,472,820 1,474,244 Dividend distribution (658,500) (658,500) Net income 10,682,399 10,682,399 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 24,430,256 $244,303 $87,890,138 $40,393,139 (37,202) $(394,076) $128,133,504 ===================================================================================================================================
See accompanying notes to consolidated financial statements. F-6 Renal Treatment Centers, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1994, 1995 and 1996
1994 1995 1996 - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 10,050,920 $ 14,630,804 $ 10,682,399 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,701,587 12,131,465 17,120,149 Deferred income taxes (497,251) (1,506,643) (1,924,546) Provision for doubtful accounts 3,121,017 4,760,678 10,240,920 Gain on sale of equipment (2,974) - - Equity in (earnings) losses from affiliate (96,312) (266,592) 15,910 Changes in operating assets and liabilities, net of effects of companies acquired: Accounts receivable (19,065,267) (19,444,635) (19,969,828) Inventories (260,546) (117,157) (1,054,213) Prepaid expenses and other current assets (506,876) 99,673 (1,167,162) Accounts payable and accrued expenses 4,365,037 585,345 4,579,714 Accrued income taxes (475,071) 1,747,000 (6,001,582) - ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 4,334,264 12,619,938 12,521,761 - ------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Capital expenditures (5,198,350) (7,899,143) (16,319,461) Purchase of businesses, net of cash acquired (50,323,267) (11,646,992) (40,791,079) Purchase of investments (38,500,000) - (55,311,044) Sale of investments 38,588,696 2,661,944 14,108,921 Other (1,214,875) (1,904,962) (3,254,313) - ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (56,647,796) (18,789,153) (101,566,976) - ------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from long-term debt borrowings 18,045,175 19,621,000 30,500,000 Proceeds from issuance of 5 5/8% Convertible Subordinated Notes due 2006 - - 121,250,000 Repayments of debt (14,032,771) (7,355,102) (70,760,938) Proceeds from issuance of common stock 51,612,289 1,302,272 3,073,748 Payment of dividend distribution (1,473,295) (1,499,330) (658,500) Increase in financing fees (282,609) - - Payments on capital lease obligations (13,846) (450,985) (1,144,718) Other 581,195 - - - ------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 54,436,138 11,617,855 82,259,592 - ------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 2,122,606 5,448,640 (6,785,623) Cash and cash equivalents at beginning of year 660,175 2,782,781 8,231,421 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 2,782,781 $ 8,231,421 $ 1,445,798 ======================================================================================================
See accompanying notes to consolidated financial statements. F-7 Renal Treatment Centers, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Renal Treatment Centers, Inc. (the "Company") was incorporated in Delaware on August 11, 1988 for the purpose of providing dialysis services for End Stage Renal Disease ("ESRD") patients in an outpatient environment or in the patient's home. Additionally, the Company has acquired or entered into inpatient dialysis service agreements with hospitals to provide dialysis treatments on an inpatient basis. For the years ended December 31, 1994, 1995 and 1996, approximately 73%, 68% and 62%, respectively, of the Company's net patient revenue was received from Medicare and Medicaid and other state administered programs. Accordingly, the Company's operations and cash flows are dependent upon the rate and manner of payment for patient services from third party payors and, in particular, federal and state administered programs. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: In February 1996, the Company acquired, through two separate transactions, Intercontinental Medical Services, Inc. ("IMS") and Midwest Dialysis Unit and its affiliates (collectively "MDU"). Each of the transactions was separately accounted for as a pooling-of-interests. The consolidated financial statements of the Company include the results of IMS and MDU as of January 1, 1996. Prior year financial statements have not been restated to reflect these transactions because the impact on the Company's financial statements of such transactions is not material. In July 1996, the Company acquired Panama City Artificial Kidney Center, Inc. and North Florida Artificial Kidney Center, Inc. (collectively "the Group"). The transaction was accounted for as a pooling-of-interests. Accordingly, the consolidated financial statements of the Company have been prepared to give retroactive effect to the merger with the Group, since this transaction, when combined with the MDU and IMS pooling transactions, was deemed to be a material transaction. Certain amounts included in the accompanying consolidated financial statements and related footnotes reflect the use of estimates based on assumptions made by management. Actual amounts could differ from these estimates. Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. Principles of Consolidation: The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Patient Revenue and Allowances: Patient revenue is recorded at established rates on the accrual basis in the period during which the service is provided. Appropriate allowances to give recognition to third-party arrangements are also recorded on the accrual basis. Payments to the Company under Medicare and Medicaid and other state administered programs are based upon a predetermined specific fee per treatment. The Company does not believe there are any significant credit risks associated with receivables from Medicare and Medicaid and other state administered programs. The allowance for doubtful accounts consists of management's estimate of amounts that may prove uncollectible from secondary insurers or patients. Patient Care Costs: Patient care costs include medical supplies, including Erythropoietin ("EPO") supplies, and salaries and benefits associated directly with patient care. Inventories: Inventories are stated at the lower of cost (determined using the first-in, first-out method) or market and consist of dialysis supplies and prescription drugs, such as EPO. Property and Equipment and Depreciation and Amortization: Property and equipment are stated at cost or respective fair market value at the time of acquisition. Equipment under capital lease is stated at the lower of the fair market value or net present value of the minimum lease payments at inception of the lease. Depreciation and amortization are provided by the straight-line method over the estimated useful lives of the related assets or lease terms for leasehold improvements and equipment under capital lease. The estimated useful life is five to seven years for furniture, fixtures and equipment, 39 years for buildings, and five to ten years for leasehold improvements. Costs of maintenance and repairs are charged to expense as incurred. Sales and retirements of depreciable assets are recorded by removing the related cost and accumulated depreciation from the accounts. Gains and losses on sales and retirements of assets are reflected in the results of operations. F-8 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Intangibles: Goodwill: Goodwill, the excess of aggregate purchase price over the fair value of the net assets of businesses acquired, is amortized on a straight-line basis, principally over 25 years. Patient Lists: Patient lists, arising from the purchase of renal dialysis centers, are stated at cost and amortized over eight years using the straight-line method. Non-Compete Agreements: Non-compete agreements, arising from acquisitions, are stated at cost and amortized over the terms of the agreements, on a straight-line basis, over periods from three to 11 years. Other Intangibles: Other intangibles consist of debt issuance costs, inpatient dialysis service agreements, deferred financing costs and organization costs and are stated at cost and amortized over five to 11 years using the straight-line method. Management evaluates intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. This evaluation is based on certain financial indicators, such as historical and future ability to generate income from operations. Income Taxes: The Company and its subsidiaries file a consolidated federal tax return and separate company state tax returns. Income taxes are provided for under the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under the liability method, deferred income taxes are recognized for the tax consequences of differences between amounts reported for financial reporting and income tax purposes by applying enacted statutory tax rates applicable to future years to such differences. Deferred taxes result primarily from temporary differences arising from a difference between the book life and the tax life of certain assets. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Federal (and state, where applicable) income taxes for HCC and the Wichita Companies (which are later defined) and IMS, MDU and the Group prior to their acquisition by the Company were payable personally by the stockholders of IMS, MDU and the Group pursuant to S corporation elections under the Internal Revenue Code. Prepaid Expenses and Other Current Assets: Prepaid expenses and other current assets consist primarily of prepaid insurance, rent, various taxes and other current assets. Accrued Expenses: Accrued expenses consist principally of uninvoiced inventory, accrued insurance and other miscellaneous accruals. Estimated Medical Professional Liability Claims: The Company is insured for medical professional liability claims through a commercial insurance policy. It is the Company's policy that a provision for estimated premium adjustments to medical professional liability costs be made for asserted and unasserted claims and based upon the Company's experience. Provision for such professional liability claims includes estimates of the ultimate costs of such claims. To date, the Company's experience with such claims has not been significant. Accordingly, no such provision has been made. Cash Equivalents: For the purpose of reporting cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The cash of the Company is principally held by one financial institution. Investments: Investments were comprised of investments in corporate bonds and government and government agency securities. Investment income is recognized when earned and realized gains and losses are recognized on a trade date basis, computed based on original cost. The investments are stated at cost, which approximates fair market value. All investments were managed by one financial institution. Subsequent to December 31, 1996, all investments were liquidated, resulting in an immaterial realized gain. F-9 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Earnings per Share: In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share" ("SFAS No. 128"). This statement establishes standards for computing and presenting earnings per share. Basic earnings per share is calculated using the average shares of common stock outstanding, while diluted earnings per share reflects the potential dilution that could occur if stock options and the earn out note were exercised. The Company adopted SFAS No. 128 in the fourth quarter of 1997. Prior period earnings per share amounts have been restated in accordance with SFAS No. 128. For the year ended December 31, 1996, the Notes are not used in the calculation as the affect is antidilutive, and as such, is not to be included in the diluted earnings per share calculation. 3. BUSINESS ACQUISITIONS: During the fiscal years 1996 and 1995, the Company completed the following five mergers. There were no mergers in 1994. Merger with the Group: On July 23, 1996, the Company acquired the Group. The two dialysis facilities acquired are located in Florida and serviced a total of approximately 185 patients as of the acquisition date. The transaction was accounted for under the pooling-of-interests method of accounting. In the transaction, the Company issued 482,377 shares of its common stock in exchange for all of the outstanding stock of the Group. The acquisition was structured as a merger of the Group into a subsidiary of the Company. Merger with MDU: On February 29, 1996, the Company acquired MDU. The 11 dialysis facilities acquired are located in Oklahoma and serviced approximately 317 patients as of the acquisition date. The transaction was accounted for under the pooling-of- interests method of accounting. In the transaction, the Company issued 767,168 shares of its common stock in exchange for all of the outstanding stock of MDU. The acquisition was structured as a merger of MDU into a subsidiary of the Company. Merger with IMS: On February 20, 1996, the Company acquired IMS. The four dialysis facilities acquired are located in Hawaii and serviced a total of approximately 444 patients as of the acquisition date. The transaction was accounted for under the pooling-of-interests method of accounting. In the transaction, the Company issued 1,047,464 shares of its common stock in exchange for all of the outstanding stock of IMS. The acquisition was structured as a merger of IMS into a subsidiary of the Company. Merger with The Wichita Companies: On July 25, 1995, with an effective date of August 1, 1995, the Company acquired Wichita Dialysis Center, P.A., Southeast Kansas Dialysis Center, P.A., Garden City Dialysis Center, P.A. and Wichita Dialysis Center, East, P.A. (the "Wichita Companies"). All of the facilities acquired are located in Kansas and serviced approximately 355 patients as of the acquisition date. The transaction was accounted for under the pooling-of-interests method of accounting. In the transaction, the Company issued 1,558,920 shares of its common stock in exchange for all of the outstanding stock of the Wichita Companies. The acquisition was structured as a merger of the Wichita Companies into a subsidiary of the Company. Merger with HCC: On March 6, 1995, the Company completed its acquisition of Healthcare Corporation and its affiliates (collectively, "HCC"). The 13 facilities acquired from HCC are located in Missouri, Illinois, North Carolina, Florida and Washington, D.C. and serviced approximately 720 patients as of the acquisition date. The transaction was accounted for under the pooling-of-interests method of accounting. In the transaction, the Company issued 2,292,222 shares of its common stock in exchange for all of the outstanding stock of HCC. The acquisition was structured as a merger of HCC into several subsidiaries of the Company. F-10 3. BUSINESS ACQUISITIONS (CONTINUED): The consolidated financial statements give retroactive effect to the mergers with the Group, the Wichita Companies and HCC and include the combined operations of the Company, the Group, the Wichita Companies, and HCC for all periods presented. The consolidated financial statements include the operations of IMS and MDU as of January 1, 1996. The following is a summary of the separate and combined results of operations for periods prior to the mergers (dollars in thousands):
Renal Treatment Centers, Inc. Pooling (Prior to Poolings) Companies* Combined ------------------- --------- -------- For the year ended December 31, 1996 Net patient revenue $217,529 $ 7,548 $225,077 Income from operations 20,495 1,180 21,675 Net income 9,985 697 10,682 1995 Net patient revenue $150,467 $14,101 $164,568 Income from operations 23,319 1,501 24,820 Net income 13,239 1,392 14,631 1994 Net patient revenue $ 86,520 $28,937 $115,457 Income from operations 12,343 2,672 15,015 Net income 7,558 2,493 10,051
*Includes pooling transactions only for period prior to acquisition. Activity subsequent to acquisition dates is included in Renal Treatment Centers, Inc. (Prior to Poolings). The acquisitions described below have been accounted for under the purchase method. The results of these acquisitions have been included in the results of operations from the applicable acquisition dates. The purchase price of the acquisitions has been principally allocated to fixed assets, patient lists, non- compete agreements and goodwill. Goodwill, which is the excess of the purchase price over the fair value of net assets, was approximately $76,058,555 and is being amortized on a straight line basis over 25 years. 1996 Acquisitions: During 1996, the Company acquired 10 dialysis centers, including several acute care contracts, in New Jersey, Georgia, Pennsylvania, Alabama, Oklahoma and the Republic of Argentina for approximately $40,791,000 in cash and the incurrence and assumption of approximately $9,201,000 of liabilities. The acquisitions included substantially all of the non-current assets and certain current assets and the assumption of certain liabilities and capital leases of the centers. 1995 Acquisitions: During 1995, the Company acquired nine dialysis centers, including several acute care contracts, in Indiana, Ohio, Texas, Florida and Nebraska for approximately $11,600,000 in cash, 302,644 shares of unregistered common stock, valued at approximately $3,642,776 at the respective dates of acquisition, and the assumption of approximately $118,000 of liabilities. The acquisitions included substantially all of the non-current assets and certain current assets and the assumption of certain liabilities and capital leases of the centers. 1994 Acquisitions: During 1994, the Company acquired 17 dialysis centers, including several acute care contracts, in Oklahoma, Colorado, Wyoming, New Jersey, Virginia, Pennsylvania and Texas for approximately $50,300,000 in cash, 175,216 shares of unregistered common stock, valued at approximately $1,812,500 at the respective dates of acquisition, and the assumption of approximately $1,200,000 of liabilities. The acquisitions included substantially all of the non-current assets and certain current assets and the assumption of various liabilities and capital lease obligations of the centers. Additionally, certain purchase agreements included provisions whereby additional purchase price may be required if the centers attain certain financial results during a specified period. Refer to note 6 to consolidated financial statements for discussion of a note issued in connection with an acquisition. F-11 3. BUSINESS ACQUISITIONS (CONTINUED): The following unaudited pro forma information combines the consolidated results of operations of the Company and the companies acquired in the acquisitions that were accounted for under the purchase method during 1995 and 1996 as if they had occurred on January 1, 1995:
(Unaudited) 1995 1996 - -------------------------------------------------------------------------------- Net patient revenue $192,497,000 $242,074,000 Income from operations 27,341,000 25,781,000 Net income 17,164,000 12,375,000 Net income per share $ 0.78 $ 0.51
The pro forma results do not necessarily represent results that would have occurred if these acquisitions had taken place at the beginning of each period, nor are they indicative of the results of future combined operations. 4. PROPERTY AND EQUIPMENT: A summary of property and equipment and related accumulated depreciation as of December 31, 1995 and 1996 is as follows:
1995 1996 - -------------------------------------------------------------------------------- Furniture, fixtures and equipment $20,775,057 $37,340,616 Leasehold improvements 7,427,458 14,699,276 Capital leases 3,161,693 5,679,063 Building 724,704 1,450,239 Land 100,066 100,066 - -------------------------------------------------------------------------------- 32,188,978 59,269,260 Less accumulated depreciation 10,746,557 19,691,015 - -------------------------------------------------------------------------------- $21,442,421 $39,578,245 ================================================================================
Capital leases primarily consist of dialysis equipment. Depreciation expense was $2,152,110, $3,846,294 and $6,601,223 for the years ended December 31, 1994, 1995 and 1996, respectively. 5. INTANGIBLE ASSETS: Intangible assets consist of goodwill and other identifiable intangibles. A summary of intangible assets and related accumulated amortization as of December 31, 1995 and 1996 is as follows:
1995 1996 - -------------------------------------------------------------------------------- Goodwill $ 59,605,978 $ 92,416,850 Patient lists 33,572,193 45,354,310 Non-compete agreements 10,048,195 16,005,803 Other intangibles, principally debt issuance costs 5,399,294 9,803,286 - -------------------------------------------------------------------------------- 108,625,660 163,580,249 - -------------------------------------------------------------------------------- Less accumulated amortization 22,263,385 32,934,871 - -------------------------------------------------------------------------------- $ 86,362,275 $130,645,378 ================================================================================
Intangible assets principally arose from acquisitions. Amortization expense was $5,450,849, $8,220,167 and $10,475,604 for the years ended December 31, 1994, 1995 and 1996, respectively. F-12 6. DEBT:
Debt as of December 31, 1995 and 1996 consists of: 1995 1996 - ------------------------------------------------------------------------------------------------ Term loan payable in quarterly installments of $625,000 $ 3,750,000 $ - Revolving credit/term facility payable in 16 equal quarterly installments 33,675,000 - Note, 6.5% payable to The Dialysis Centers Limited Liability Company in four annual installments of variable amounts commencing on June 1, 1995 6,627,690 5,154,870 Note, 5.5% payable to Columbus Regional Dialysis Center, Inc. in one installment due January 1997 - 3,622,500 Note, 5.5% payable to Phenix City Nephrology Referral Center, Inc. in one installment due January 1997 - 4,427,500 Term loans payable in monthly installments of $15,912 1,041,576 - Convertible Subordinated Notes, 5 5/8%, due 2006 - 125,000,000 Other - 1,144,297 Capital lease obligations 2,291,418 3,593,883 Unamortized debt discount (43,322) - - ------------------------------------------------------------------------------------------------ 47,342,362 142,943,050 Less current portion (4,766,262) (12,369,365) - ------------------------------------------------------------------------------------------------ $42,576,100 $130,573,685 ================================================================================================
The Company's Credit Agreement provides for a $100,000,000 revolving credit/term facility available to fund acquisitions and general working capital requirements, of which no amounts and $33,675,000 were outstanding as of December 31, 1996 and December 31, 1995, respectively. Prior to the amendment of the Credit Agreement on June 5, 1996, the Credit Agreement also provided for a term loan payable in quarterly installments, of which $3,750,000 was outstanding as of December 31, 1995. On June 5, 1996, the Credit Agreement was amended to increase the amount available under the revolving credit facility from $68,125,000 to $100,000,000 and to make certain other changes to the terms of the Credit Agreement, including amendments to certain covenants, the amortization schedule, the interest rates and the events of default. In connection with this amendment, the $3,125,000 principal amount outstanding under the term loan as of June 5, 1996 was repaid through borrowings under the revolving credit facility. The Company must pay an annual commitment fee on the average daily unutilized commitment in the amount of .25% - .35%, determined by the Company's ratio of senior debt to annualized cash flow (the "Applicable Margin"). Borrowings under the Credit Agreement bear interest, at the Company's option, at either (i) the agent bank's base rate plus 0.25% if the Applicable Margin is not less than 2.25 to 1, payable on a quarterly basis or (ii) a one-, two-, three-, or six-month period LIBOR rate plus 0.75% to 1.75% depending upon the Applicable Margin, payable at maturity. The weighted average interest rate of all loans outstanding at December 31, 1995 was 7.4%. The Credit Agreement also provides for the issuance of letters of credit up to $5,000,000 provided that the aggregate of all outstanding letters of credit plus the outstanding aggregate principal amount of all revolving credit/term loans does not exceed the lesser of the total revolving credit/term commitment or the patient borrowing base, as defined in the Credit Agreement, at such time. As of December 31, 1995 and 1996, there were no letters of credit outstanding. The loans are collateralized by all stock of the Company's subsidiaries and the assignment of all intercompany notes. The Credit Agreement limits additional indebtedness, acquisitions, investments and dividends and requires the Company to comply with certain other covenants and maintain certain financial ratios. The dividend distributions presented in the Consolidated Statement of Stockholders' Equity in 1994, 1995 and 1996 were paid to the former stockholders of HCC, the Wichita Companies and the Group and were not subject to the Credit Agreement limitation on dividend payments. In June 1996, the Company issued $125,000,000 of 5 5/8% Convertible Subordinated Notes due 2006 (the "Notes") . The Notes are convertible, at the option of the holder, at any time after August 12, 1996 through maturity, unless previously redeemed or repurchased, into Common Stock at a conversion price of $34.20 principal amount per share, subject to certain adjustments. The fair value of the Notes was approximately $120,625,000 at December 31, 1996. At any time on or after July 17, 1999, all or any part of the Notes will be redeemable at the Company's option on at least 15 and not more than 60 days notice as a whole or, from time to time, in part at redemption prices ranging from 103.94% to 100.00% of the principal amount thereof, depending on the year of redemption, together with accrued interest to, but excluding, the date fixed for redemption. In June 1994, pursuant to a business acquisition, the Company entered into an agreement to pay the Seller, The Dialysis Centers Limited Liability Company, $7,364,100, payable in annual installments commencing June 1995 through June 1998. Interest on the unpaid principal amount of the note accrues at an annual rate of 6.50%, payable in arrears each June 1 from 1995 through 1998. The note allows the Seller to convert the principal amount of the note into that number of shares of common stock of the Company which shall be equal to the quotient of the outstanding unpaid principal amount of the note divided by the average daily closing sale price of F-13 6. DEBT (CONTINUED): the stock during December, 1994 ($10.3425 per share, outstanding balance convertible into 498,416 shares of common stock at December 31, 1996). The fair value of the Company's 6.50% Note was approximately $12,709,608 at December 31, 1996. The term loans are the result of four separate agreements (the "Group Agreements") entered into by the Group with two banks. The Group Agreements provided for a total of $1,350,000 in term loans and a $350,000 revolving line of credit. Subsequent to the consummation of the merger with the Group as described in notes 2 and 3 to the consolidated financial statements, the Company paid off all of the indebtedness related to the Group Agreements. In September 1996, pursuant to a business acquisition, the Company entered into an agreement to pay the Sellers, Columbus Regional Dialysis Center, Inc. and Phenix City Nephrology Referral Center, Inc., a total of $8,050,000 in one installment on January 3, 1997. Interest on the principal amount of the note accrues at an annual rate of 5.5% payable January 3, 1997. Unless otherwise noted above, the carrying amount of long term debt approximates its fair value. Maturities of debt outstanding, excluding capital leases, as of December 31, 1996 for each of the next five years is as follows:
Year -------------------------- 1997 $11,403,527 1998 2,945,640 1999 - 2000 - 2001 -
7. INCOME TAXES: The provision for income taxes for the years ending December 31, 1994, 1995 and 1996 consists of the following:
1994 1995 1996 - -------------------------------------------------------------------------------- Current: Federal $4,327,339 $ 8,330,951 $7,852,091 State and local 485,926 807,761 681,326 - -------------------------------------------------------------------------------- 4,813,265 9,138,712 8,533,417 - -------------------------------------------------------------------------------- Deferred: Federal (447,584) (1,372,961) (1,694,959) State and local (49,667) (133,682) (229,587) - -------------------------------------------------------------------------------- (497,251) (1,506,643) (1,924,546) - -------------------------------------------------------------------------------- $4,316,014 $ 7,632,069 $ 6,608,871 ================================================================================
The tax effects of temporary differences which comprise the net deferred tax asset are as follows:
December 31, ------------ 1995 1996 ---- ---- Deferred tax debits: Allowance for doubtful accounts $ 780,978 $ 2,136,098 Intangibles, principally patient lists 2,926,430 5,241,100 Property and equipment 178,417 - Other 38,857 13,620 - -------------------------------------------------------------------------------- 3,924,682 7,390,818 - -------------------------------------------------------------------------------- Deferred tax credits: Property and equipment - (164,806) Goodwill (1,355,093) (2,269,230) - -------------------------------------------------------------------------------- (1,355,093) (2,434,036) - -------------------------------------------------------------------------------- Net deferred tax asset $ 2,569,589 $ 4,956,782 ================================================================================
F-14 7. INCOME TAXES (CONTINUED): The following is a reconciliation of the statutory federal income tax rates to the effective rates as a percentage of income before provision for income taxes as reported in the financial statements for the years ended December 31, 1994, 1995 and 1996:
1994 1995 1996 - ----------------------------------------------------------------------------- U.S. federal income tax rate 34.2% 35.0% 35.0% State income taxes, net of federal income tax benefit 2.4% 2.4% 2.5% Non-tax effected items, principally intangibles 0.8% 1.8% 1.7% Federal and state income tax benefit from S corporation status of HCC, the Wichita Companies and the Group (6.4%) (3.5%) (0.9%) Other (1.0%) (1.4%) (0.1%) - ----------------------------------------------------------------------------- Effective income tax rate 30.0% 34.3% 38.2% =============================================================================
8. BENEFIT AND COMPENSATION PLANS: The Company has a defined contribution savings plan covering substantially all employees. The Company's contributions under the plan were approximately $388,497, $462,004, and $548,471 for the years ended December 31, 1994, 1995 and 1996, respectively. In September 1990, the Company established a stock plan, pursuant to which incentive stock options and non-qualified stock options may be issued to employees and others through the year 2000. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its stock plan. FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and, if fully adopted by the Company, changes the method for recognition of cost on stock plans. Although the Company has elected not to adopt the cost recognition requirements under SFAS 123, pro-forma disclosures as if the Company had adopted the requirements beginning in 1995 are presented below:
1995 1996 - ----------------------------------------------------------------------------- Net earnings - as reported $14,630,804 $10,682,399 Net earnings - pro-forma 14,165,049 8,350,485 Earnings per share - as reported 0.67 0.44 Earnings per share - pro-forma $ 0.65 $ 0.34
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in 1995 and 1996: expected volatility of 29.3% regardless of varying expected terms; no dividend payments are made for the expected terms; expected term of 3 years for options that vest over time and 3 years for options which vest immediately; risk-free interest rate on the date of grant with the maturity equal to the expected term; exercise price equal to the fair market value on grant date. Incentive stock options may be granted at an exercise price not less than the fair market value of the Company's common stock on the date of grant. Non- qualified stock options may be granted at an exercise price not less than the lower of the book value of the Company's common stock or 50% of the fair market value per share of common stock on the date of grant. Accordingly, compensation expense for the difference between the fair market value and the exercise price for non-qualified stock options issued is recorded over the vesting period of such options. In 1995 and 1996, the stock plan was amended to increase the number of shares available for grant to 2,437,000 and 3,237,000 shares, respectively. In addition, the Company established an option plan for outside directors pursuant to which non-qualified stock options to purchase up to 60,000 shares may be issued to non-employee directors of the Company. These options may be granted at an exercise price not less than the fair market value of the Company's common stock on the date of grant. In February 1994, the Company granted 170,000 incentive stock options to certain officers and employees of the Company. These options were granted at an exercise price equal to the fair market value of the Company's common stock on the date of grant. These options vest over the next two years. In May 1995, the Company granted 419,144 incentive stock options to certain directors, officers and employees of the Company. These options were granted at an exercise price equal to the fair market value of the Company's common stock on the date of the grant. These options vest over the next three years. Certain options totalling 305,000 vest upon the earlier of attainment of predetermined earnings per share targets or nine years. F-15 8. BENEFIT AND COMPENSATION PLANS (CONTINUED): In March 1996, the Company granted 615,332 incentive stock options to certain directors, officers and employees of the Company. These options were granted at an exercise price equal to the fair market value of the Company's common stock on the date of the grant. These options vest over the next four years. Certain options aggregating 173,332 vest upon the earlier of attainment of predetermined earnings per share targets or ten years. In December 1996, the Company granted 100,000 incentive stock options to an officer of the Company. These options were granted at an exercise price equal to the fair market value of the Company's common stock on the date of the grant. The options are fully vested. Also in December 1996, the Company granted 30,000 non-qualified stock options in connection with the release of the Company from certain obligations. The options were granted at an exercise price equal to the fair market value of the Company's common stock on the date of grant. The options are fully vested, with the exceptions of options for 10,000 shares, which vest no later than January 1998. Approximately $50,000 per year was recorded as compensation expense during 1994 and 1995, in connection with incentive and non-qualified options to officers of the Company, which have been amortized over the remaining vesting period. Certain options outstanding at December 31, 1996, which were issued to certain officers and employees of the Company, become fully vested upon certain sales of assets, mergers and consolidations involving the Company, as set forth in the respective employee and stock option agreements. The remaining options outstanding at December 31, 1996, which are issued to certain officers and employees of the Company, become fully vested upon certain sales of assets, mergers and consolidations involving the Company, at the option of the Stock Plan Committee. The following is a summary of option transactions and exercise prices:
Number of Price Per Shares Share Outstanding at December 31, 1994 1,281,930 $0.055-$11.25 - ------------------------------------------------------------------------------ Granted 413,144 $11.50-$16.75 Exercised (448,676) $ 0.005-$11.25 Forfeited 4,000 $11.25 Outstanding at December 31, 1995 1,242,398 $ 5.25-$11.50 - ------------------------------------------------------------------------------ Granted 747,098 $21.81-$26.25 Exercised (263,531) $ 5.25-$21.81 Forfeited 8,000 $11.25-$12.44 Outstanding at December 31, 1996 1,717,965 $ 5.25-$26.25 - ------------------------------------------------------------------------------ Exercisable at December 31, 1996 724,272 ==============================================================================
9. CAPITAL STOCK: On January 30, 1996, the Board of Directors of the Company declared a dividend on the Company's common stock of one share of common stock for each share outstanding, thereby effecting a 2-for-1 stock split. The dividend shares were issued on March 14, 1996 to stockholders of record as of February 29, 1996. Additionally, on February 29, 1996, the Company amended its capital structure to increase the Company's authorized capital to 45,000,000 shares of $0.01 par value common stock and 5,000,000 shares of $.01 par value Series Preferred Stock. All references in the financial statements to outstanding and authorized common shares, average number of shares outstanding and related prices, per share amounts and stock plan data have been restated to reflect the split effected by the stock dividend. F-16 10. LEASING ARRANGEMENTS: The Company leases certain of its operating facilities, corporate office and furniture and equipment under non-cancelable leases for terms ranging from four to ten years with certain renewal options. Certain of these facilities are leased by the Company from medical directors. Future minimum lease payments as of December 31, 1996, are as follows:
Third-party Operating Leases Capital Operating with Medical Leases Leases Directors - ------------------------------------------------------------------------------------------------------------------ 1997 $1,221,616 $ 6,108,929 $ 1,637,146 1998 1,535,510 5,774,992 1,649,447 1999 1,139,521 5,704,805 1,477,600 2000 171,236 5,328,609 1,469,543 2001 and thereafter - 29,460,511 5,771,086 - ------------------------------------------------------------------------------------------------------------------ Total minimum lease payments $4,067,883 $52,377,846 $12,004,822 - ---------------------------------------------------------------- =============================================== Less amount representing interest 474,001 Present value of net minimum payments under capital leases $3,593,883 Less current portion 965,838 - ---------------------------------------------------------------- $2,628,045 ================================================================
Rent expense paid to third parties under operating leases was $3,270,066, $4,921,026 and $5,497,285 for the years ended December 31, 1994, 1995 and 1996, respectively. Rent expense paid to medical directors under facility operating leases was $832,454, $1,030,208 and $1,350,253 for the years ended December 31, 1994, 1995 and 1996 respectively. 11. COMMITMENTS AND CONTINGENCIES: The Company has entered into long-term compensation agreements with the medical directors of each dialysis facility. The agreements range from one to ten years with certain agreements containing one to ten year options to renew. The agreements provide for total annual compensation as follows:
Physician Director Year Compensation - -------------------------------------------------------------------------------- 1996 $ 7,615,205 1997 8,349,101 1998 8,004,982 1999 6,818,381 2000 and thereafter 28,459,671 - -------------------------------------------------------------------------------- Total minimum payments $59,247,340 ================================================================================
The Company has employment agreements with seven officers. These agreements provide for total annual compensation of $1,265,000 and provide that in the event any payment or benefit received by any of them in connection with a change of control is deemed an "excess parachute payment" under the Internal Revenue Code, the Company shall pay the officer a cash bonus equal to any additional tax liability imposed upon him as a result. The Company is a party to certain legal actions arising in the ordinary course of business. The Company believes it has adequate legal defenses and/or insurance coverage for these actions and that the ultimate outcome of these actions will not have a material adverse impact on the Company's results of operations, financial condition or liquidity. F-17 12. SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental disclosure of cash flow information for the years ended December 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996 - ------------------------------------------------------------------------------------------------------------------------ Cash paid for: Interest $1,090,192 $2,177,255 $ 3,609,972 ======================================================================================================================== Income taxes $4,857,551 $5,680,430 $17,198,434 ======================================================================================================================== Non-cash investing and financing activities: Capital lease obligations entered into $ 542,032 $2,081,699 $ 2,553,368 ======================================================================================================================== Issuance of common stock in connection with purchase of business $1,812,500 $3,119,747 $ - ======================================================================================================================== Earnout note issued in connection with purchase of business $7,364,100 $ - $ - ======================================================================================================================== Acquisition of treasury stock in connection with payroll taxes resulting from exercise of stock options $ 47,219 $ 346,857 $ - ======================================================================================================================== Liabilities assumed in connection with purchases of businesses $1,200,000 $ 118,000 - ======================================================================================================================== Issuance of common stock in connection with earn out note - $ 523,029 $ 1,474,244 ======================================================================================================================== Issuance of short term notes in connection with purchases of businesses $ - $ - $ 9,194,297 ======================================================================================================================== Issuance of common stock in connection with the IMS and MDU mergers $ - $ - $ 3,203,653 ======================================================================================================================== Financing fees incurred in the Notes offering $ - $ - $ 3,750,000 ========================================================================================================================
13. EARNINGS PER SHARE Earnings per share have been restated in accordance with SFAS No. 128. This restatement resulted in no material change from amounts previously reported. Earnings per share are computed as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1994 1995 1996 Basic earnings per share: Net income available for common stock.. $10,050,920 $14,630,804 $10,682,399 =========== =========== =========== Average common stock out- standing...... 20,412,982 21,868,067 24,230,156 =========== =========== =========== Basic earnings per share..... $ 0.49 $ 0.67 $ 0.44 =========== =========== =========== Diluted earnings per share: Net income..... 10,050,920 14,630,804 10,682,399 Add back inter- est on earnout note, tax ef- fected........ -- 283,136 232,573 ----------- ----------- ----------- Net income available for Common Stock and dilutive securities.... $10,050,920 $14,913,940 $10,914,972 =========== =========== =========== Average Common Stock outstand- ing............. 20,412,982 21,868,067 24,230,156 Additional common shares resulting from dilutive securities: Stock options.. 313,135 544,666 837,744 Earnout note... 682,402 578,400 ----------- ----------- ----------- Average Common Stock and dilutive securi- ties outstand- ing............. 20,726,117 23,095,135 25,646,300 =========== =========== =========== Diluted earnings per share....... $ 0.48 $ 0.65 $ 0.43 =========== ========== ===========
14. FINANCIAL STATEMENT REVISIONS: Certain adjustments have been made to the 1996 financial statements to correct previously reported amounts. The balance sheet at December 31, 1996 had previously included, at full value, approximately $14 million of uncollectible accounts receivable for which no provision or contractual allowance was established. Previously issued financial statements for 1996 have been restated to reflect the above matters, as follows (dollars in thousands, except per share amounts):
Restated Previously Amount Presented ------ --------- 1996: Accounts receivable, net $ 65,199 $ 79,138 Total current assets 120,917 129,689 Total assets 293,948 302,720 Total stockholders' equity 128,134 136,741 Total liabilities and stockholders' equity 293,948 302,720 Net patient revenue 225,077 235,397 Net income 10,682 19,290 Primary net income per common share $ 0.43 $ 0.77 Fully diluted net income per common and common stock equivalent $ 0.43 $ 0.76 Basic earnings per share $ 0.44 $ -- Diluted earnings per share $ 0.43 $ --
15. Subsequent Event: On February 26, 1998, the Company's stockholders approved the merger with Total Renal Care Holdings, Inc. ("TRCH") which became effective on February 27, 1998 (the "Merger"). The Merger is expected to be accounted for as a pooling-of-interests. In connection with the Merger, each of the Company's stockholders will receive 1.335 shares of TRCH common stock. The Merger constituted a "change in control" and resulted in certain executives terminating their employment for good reason. In connection with the Merger, these certain executives received severance payments and their 1997 bonuses totaling approximately $2,000,000. Merger bonuses of approximately $4,600,000; and $8,850,000 for covenants not to compete. In addition, 978,081 of previously issued stock options to employees, which had an automatic change in control provision in the option grant, became fully vested on February 27, 1998. F-18 Renal Treatment Centers, Inc. and Subsidiaries SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS for the years ended December 31, 1996, 1995 and 1994
- ------------------------------------------------------------------------------------------------------------------------- BALANCE AT ADDITIONS BEGINNING CHARGED TO COSTS BALANCE AT DESCRIPTION OF YEAR AND EXPENSES DEDUCTIONS END OF YEAR - ------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1996: (1) Allowance for doubtful receivables $3,503,744 $10,240,920 $5,891,314 $7,853,350 - ------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1995: (1) Allowance for doubtful receivables $2,306,556 $ 4,760,678 $3,563,490 $3,503,744 - ------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1994: (1) Allowance for doubtful receivables $1,123,211 $ 3,121,017 $1,937,672 $2,306,556 - -------------------------------------------------------------------------------------------------------------------------
(1) Amounts represent writeoffs of uncollectible receivables, net of recoveries. F-19 EXHIBIT INDEX Exhibits Description - -------- ----------- 3.1 Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit No. 3.1 filed under the Company's Amendment No. 1 to Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996). 3.1.1 Certificate of Amendment dated February 29, 1996 to Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit No. 3.1.1 filed under the Company's Amendment No. 1 to Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996). 3.2 By-Laws of the Company and Amendment to By-Laws adopted February 9, 1993 (incorporated herein by reference to Exhibit No. 3.2 filed under the Company's Form S-1 Registration Statement No. 33-59850). 4.1 Specimen Certificate of Common Stock of the Company (incorporated herein by reference to Exhibit No. 4.1 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 4.2 Indenture dated June 12, 1996 by the Company to PNC Bank, National Association, Trustee, including form of the Company's 5 5/8% Convertible Subordinated Notes due 2006 issued under the Indenture (incorporated herein by reference to Exhibit No. 4.2 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 4.3 Registration Rights Agreement dated as of June 12, 1996 by and among the Company, Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC, J.C. Bradford & Co. and Wessels, Arnold & Henderson (incorporated herein by reference to Exhibit No. 4.3 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.1* Renal Treatment Centers, Inc. Amended and Restated 1990 Stock Plan.+ 10.1.1* Form of Stock Option Agreement under the Company's Amended and Restated 1990 Stock Plan (incorporated herein by reference to Exhibit No. 10.1.3 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2* Renal Treatment Centers, Inc. Equity Incentive Plan for Outside Directors (incorporated herein by reference to Exhibit No. 10.2 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.2.1* Form of Stock Option Agreement under the Company's Equity Incentive Plan for Outside Directors (incorporated herein by reference to Exhibit No. 10.2.1 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.2.2* Amendment No. 1 to the Company's Equity Incentive Plan for Outside Directors dated May 2, 1996 (incorporated herein by reference to Exhibit No. 10.2.2 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.3* Employment Agreement dated as of March 2, 1995 between the Company and Robert L. Mayer, Jr. (incorporated herein by reference to Exhibit No. 10.3 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.3.1* First Amendment to Employment Agreement dated as of May 2, 1996 between the Company and Robert L. Mayer, Jr. (incorporated herein by reference to Exhibit No. 10.3.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.4* Employment Agreement dated as of March 2, 1995 between the Company and Frederick C. Jansen (incorporated herein by reference to Exhibit No. 10.4 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.4.1* First Amendment to Employment Agreement dated as of May 2, 1996 between the Company and Frederick C. Jansen (incorporated herein by reference to Exhibit No. 10.4.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.5* Employment Agreement dated as of May 2, 1996 between the Company and Barbara A. Bednar (incorporated herein by reference to Exhibit No. 10.5 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.6* Employment Agreement dated as of August 30, 1993 between the Company and John Chambers (incorporated herein by reference to Exhibit No. 10.6 filed under the Company's Form S-1 Registration Statement No. 33-74994). 10.6.1* First Amendment to Employment Agreement dated as of May 2, 1996 between the Company and John A. Chambers (incorporated herein by reference to Exhibit No. 10.6.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.7* Resignation Agreement and Release dated January 13, 1995 by and between the Company and Michael C. Duke (incorporated herein by reference to Exhibit No. 10.7 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10.8* Executive Severance Agreement dated as of May 1,1995 between the Company and Barbara A. Bednar (incorporated herein by reference to Exhibit No. 10.8 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.8.1* First Amendment to Executive Severance Agreement dated as of May 2, 1996 between the Company and Barbara A. Bednar (incorporated herein by reference to Exhibit No. 10.8.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.9* Executive Severance Agreement dated as of May 1, 1995 between the Company and Ronald H. Rodgers, Jr. (incorporated herein by reference to Exhibit No. 10.9 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.9.1* First Amendment to Executive Severance Agreement dated as of May 2, 1996 between the Company and Ronald H. Rodgers, Jr. (incorporated herein by reference to Exhibit No. 10.9.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.10* Executive Severance Agreement dated as of May 1, 1995 between the Company and John A. Chambers (incorporated herein by reference to Exhibit No. 10.10 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.10.1* First Amendment to Executive Severance Agreement dated as of May 2, 1996 between the Company and John A. Chambers (incorporated herein by reference to Exhibit No. 10.10.1 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.11 Fourth Amended and Restated Loan Agreement dated as of June 5, 1996 between the Company and First Union National Bank of North Carolina and the other lenders set forth therein (incorporated herein by reference to Exhibit No. 99.1 filed under the Company's Current Report on Form 8-K dated May 29, 1996). 10.12 Lease Agreement dated November 8, 1991 between the Company and Terramics/Southpoint Associates II Limited Partnership (incorporated herein by reference to Exhibit No. 10.32 filed under the Company's Form S-1 Registration Statement No. 33-59850). 10.12.1 First Amendment to Lease Agreement dated January 18, 1993 (incorporated herein by reference to Exhibit No. 10.32 filed under the Company's Form S-1 Registration Statement No. 33-59850). 10.12.2 Second Amendment to Lease dated September 30, 1993 (incorporated herein by reference to Exhibit No. 10.36 filed under the Company's Form S-1 Registration Statement No. 33-74994). 10.12.3 Confirmation of Lease Term dated November 1, 1993 (incorporated herein by reference to Exhibit No. 10.36 filed under the Company's Form S-1 Registration Statement No. 33-74994). 10.12.4 Third Amendment to Lease dated March 2, 1995 (incorporated herein by reference to Exhibit No. 10.12.4 filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.12.5 Fourth Amendment to Lease dated May 30, 1996 (incorporated herein by reference to Exhibit No. 10.12.5 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.13 Earnout Note dated June 1, 1994 by and between Renal Treatment Centers- Colorado, Inc., Renal Treatment Centers - Nebraska, Inc., Renal Treatment Centers - Wyoming, Inc. and The Dialysis Centers Limited Liability Company (incorporated herein by reference to Exhibit No. 2 filed under the Company's Form 8-K Current Report dated June 15, 1994). 10.14 Agreement and Plan of Merger dated as of July 25, 1995 among the Company, Renal Treatment Centers -Kansas, Inc. and the individuals and their affiliated companies set forth therein (incorporated herein by reference to Exhibit No. 2.1 filed under the Company's Form 8-K Current Report dated August 1, 1995). 10.15 Agreement and Plan of Merger dated as of January 11, 1996 among the Company, Renal Treatment Centers - Hawaii, Inc., Intercontinental Medical Services, Inc. and Dudley S.J. Seto, M.D. (incorporated herein by reference to Exhibit No. 2.1 filed under the Company's Current Report on Form 8-K dated February 20, 1996). 10.16* Employment Agreement dated as of May 2, 1996 between the Company and Ronald H. Rodgers, Jr. (incorporated herein by reference to Exhibit No. 10.25 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.17* Employment Agreement dated as of March 11, 1996 between the Company and Thomas J. Karl (incorporated herein by reference to Exhibit No. 10.26 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.18* Executive Severance Agreement dated as of March 11, 1996 between the Company and Thomas J. Karl (incorporated herein by reference to Exhibit No. 10.27 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.19 Asset Purchase Agreement dated as of May 29, 1996 between Renal Treatment Centers - Pennsylvania, Inc. and KCCC Liquidating Trust (incorporated herein by reference to Exhibit No. 2.1 filed under the Company's Current Report on Form 8-K dated May 29, 1996). 10.20 Asset Purchase Agreement dated as of May 29, 1996 between Renal Treatment Centers - Pennsylvania, Inc. and KCDC Liquidating Trust (incorporated herein by reference to Exhibit No. 2.2 filed under the Company's Current Report on Form 8-K dated May 29, 1996). 10.21* Employment Agreement dated as of March 1, 1996 between the Company and Mark A. Zawiski (incorporated herein by reference to Exhibit No. 10.30 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.22* Executive Severance Agreement dated as of March 1, 1996 between the Company and Mark A. Zawiski (incorporated herein by reference to Exhibit No. 10.31 filed under the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.23 Asset Purchase Agreement dated as of September 7, 1996 between Renal Treatment Centers - Georgia, Inc. and Columbus Regional Dialysis Center, Inc. (incorporated herein by reference to Exhibit No. 2.1 filed under the Company's Current Report on Form 8-K dated September 16, 1996). 10.24 Asset Purchase Agreement dated as of September 7, 1996 between Renal Treatment Centers - Alabama, Inc. and Phenix City Nephrology Referral Center, Inc. (incorporated herein by reference to Exhibit No. 2.2 filed under the Company's Current Report on Form 8-K dated September 16, 1996). 21.1 Subsidiaries of the Company.+ 27.1 Amended Financial Data Schedule.X _______________ * Management Contracts and Compensatory Plans or Arrangements + Previously filed under the Company's Annual Report on Form 10-K for the year ended December 31, 1996. X Included in this filing. EX-27.1 2 AMENDED FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,445,798 41,202,123 73,051,874 7,853,350 4,388,290 120,916,840 59,269,260 19,691,015 293,947,527 35,240,338 125,000,000 0 0 244,303 127,889,201 293,947,527 0 225,076,500 0 114,803,209 76,376,801 10,240,920 6,364,556 17,291,270 6,608,871 10,682,399 0 0 0 10,682,399 .44 .43
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